About those prices at the pump… How often have you discussed this in a social or family setting? When armed with the facts, this topic can easily be turned into a chance to educate others and change negative perceptions. “People deserve to know the facts about gas prices, and we should do our best to get them out on the table,” says Brooks Herring, manager, brands and strategy, Shell Oil Products US. Pump prices are set by competitive market conditions, but a variety of factors influence the market. Among them? The cost of the ingredients that go into gasoline, especially crude oil; the cost of refining the crude oil into a finished fuel; transportation, distribution and marketing costs; federal, state and local taxes; and government regulations. But, that’s not all. For example, market conditions also depend on when and where you buy gasoline. Crude Oil Costs Crude oil is the primary ingredient in gasoline. Like any other commodity, the price of crude oil is affected by those familiar economic fundamentals, supply and demand. Since the United States is heavily dependent on foreign oil supplies, the price U.S. refineries pay for oil is influenced by market conditions worldwide. About 40 percent of the world’s oil comes from OPEC, the Organization of Petroleum Exporting Countries (Shell produces about 3 percent of the world’s oil). When OPEC reduces or even announces plans to reduce its output, the price of oil typically goes up. That, in fact, is what happened earlier this year. Later, Saudi Arabia, an OPEC member and the world’s largest oil producer, pledged to increase its output by 10 percent in June. The increased production levels helped meet higher demand, but prices continued to rise because of other global factors. Turmoil in major oil-producing countries, such as the war in Iraq, can have an impact as well. These events not only disrupt crude oil supplies, but also cause the market to rise because of traders’ concerns about future supply availability. As a result of all these factors, crude oil inventories across the world are at the lowest level since 1975. In the meantime, global oil demand is rising by about 2.5 million barrels per day — the highest rate in 25 years — primarily because of brisk economic growth in India, Brazil and China, the International Energy Agency reports. Consequently, crude oil prices surpassed the record reached in 1990 when Iraq invaded Kuwait. When OPEC reinforced its desire to push prices lower, crude oil prices fell substantially. The decline was brief, as demand continued to increase and the fear of supply disruptions pushed prices back toward record highs. Additives All gasolines are required by the Environmental Protection Agency (EPA) to have a minimum amount of cleaning additives that help reduce emissions. Discount brands typically put in no more than the minimum required amount. However, extensive testing has shown that, for some cars, the minimum amount is insufficient to prevent the build-up of harmful carbon deposits on critical engine parts, specifically intake valves and fuel injectors. Shell Regular and Plus gasolines contain twice the minimum required cleaning agents, which effectively prevents the build-up of deposits. And, our new premium gasoline, Shell V-Power®, has more than five times the minimum requirement to actively clean your engine as you drive. It not only prevents the buildup of deposits, but it actually cleans up the deposits left by lower-detergent gasolines. Boutique Fuels In the summer, more motorists are on the road, which drives up gasoline demand. But that’s not the only reason the market sometimes reacts when the weather warms up. The U.S. government requires cleaner-burning gasoline to be sold during the summer in areas with significant air pollution problems. Different areas use different fuel formulations to address air-quality concerns. Just two decades ago, there were four different kinds of motor fuels required in this country. Now there are more than 100, and they’re more expensive to make than conventional gasoline blends. The myriad of gasoline types produced has led them to be called boutique fuels. What’s more, they’re not interchangeable, which means there can be supply issues when the summer blends are being transitioned and there’s less flexibility to move gasoline into areas where shortages might arise. In the winter, gasoline demand drops, and refiners focus on producing home heating oil. However, by mid-February they must begin converting their operations to make summer-blend gasoline. As inventories of winter-blend gasoline drop, the market sometimes reacts to issues of low supply until the transition to summer-blend fuels is complete. The same thing happens at the end of the summer as refineries begin reducing their production of summer-blend gasoline and prepare to make heating oil for the winter. Location Another reason the market varies from location to location is this: the farther away from the supply source, the higher the price of gasoline because of transportation costs. For example, about half the gasoline produced in the U.S. comes from refineries on the Gulf Coast, so gasoline transportation there tends to be less expensive than in areas without refining capabilities. Taxes Local, state and federal taxes account for almost one-third of the price of gasoline and also have one of the biggest impacts on regional price variations. But things could be worse: fuel taxes in England in 2003, for example, were significantly higher than they were in the United States. Regulations In recent years, the government has enacted regulations that mandate the reduction of components in gasoline that contribute to air pollution. While these changes are important to help clean the environment, the cost of compliance with these regulations has increased the cost of refining, storing and distributing gasoline. Return On Investment Businesses that sell products or services expect a reasonable return on their investment, and oil companies are no exception. Over the last five years, oil and natural gas companies’ profit margins — the difference between the cost to produce a product and the price for which it’s sold — were about the same as U.S. industry as a whole, according to compilations by Business Week. During the fourth quarter of 2003, petroleum company profits were slightly lower than the U.S. industry average. Individual Operators Setting Their Own Prices The owner or operator of the station where you buy your gasoline sets the price you pay at the pump. In determining that price, they consider such factors as the desirability of the location, traffic patterns, competition from other fuel suppliers and their marketing strategy. Inflation Higher gasoline prices can put a dent in drivers’ pocketbooks, but let’s put them into perspective. According to the U.S. Bureau of Labor, gasoline prices have risen less than other products, such as food and housing. And compared to some other countries, gasoline in the U.S. is a bargain; motorists pay more than $4 per gallon in such places as Hong Kong, London and Paris. And every day in the U.S., people pay less for a gallon of gasoline than for a gallon of milk, a liter of bottled water or a designer cup of coffee.
| 
